What a splendid idea: A Consumer Finance Protection Agency whose sole purpose is to provide a set of standards for the finance industry when it comes to marketing their products to otherwise naive US consumers.

The original plan was to have a standard form for major finance purchases — mortgages, cars, revolving credit. This would allow consumers to 1) Understand the amount of money the financing would cost them; 2) Determine if they could afford this product; 3) Allow them to shop competitively for the best rates.

Good idea, right? Considering that we people made the Snuggie, the Sham-Ease, and Hair-in-a-Can all best sellers, perhaps a little impulse control is a good idea. More accurate cost disclosures of credit will also help. Americans need help figuring out exactly what all this stuff costs when you include finance charges. We are, after all, a country of math-phobic shopaholic shit junkies. Anything that can help us figure out whether we can afford our bigger purchases — like cars and houses — should be a no-brainer.

Unfortunately, the banking lobby, in conjunction with the auto dealers lobby, had other ideas. A simple mandate to have all mortgages shown compared to a plain vanilla 30 year fixed was thwarted. It was to be similar to the FDA nutrition disclosures on the side of your kid’s cereal box. Who, could possibly object to that?

That the banking lobby stopped this simple consumer disclosure in its tracks reveals they want nothing to stand in between themselves and any profit, no matter how ill-gotten. The less informed of a shopper, the better. That even this simple consumer disclosure was thwarted is testament to how corrupt Congress has become. They can’t even get something this modest — and needed — passed.

Think back to the boom times of yesteryear. How many Americans actually understand the mortgages they were applying for? Did they calculate the costs, obligations and risks of their loans? Did they understand the cost and differences between Refis, HELOCs, and piggyback loans? The answer for the vast majority of US citizens is an emphatic NO. If anyone needs better disclosure of financial costs, it is the mathematical illiterates — innumerates — here in the USA.

Over the years, I have had countless conversations with home buyers about their mortgages. From 2003 to 2008, a typical a cocktail party or a BBQ invariably went something like this:

Home-Buyer: We got a great deal on our new mortgage.Me: Did you do a 30 year fixed or something more exotic?HB: 30 year fixed — at 4.5% !BR: Sorry, but that’s not 30 year fixed — rates are 6.5% today. That’s probably a 2/28, with a reset in 200X.HB: No, we definitely asked for a 30 year fixed.BR: Well, that’s not what you got — its impossible to get that loan at that rate today.HB: We’re good negotiators.BR: Mortgage rates are set by the bond market. Banks charge a mark up ABOVE the rates that they can borrow money. They can’t get 30 year money at 4.5%, so you can’t get 4.5%. There is only so much negotiating you can do with the bond market.HB: Well, its definitely a 30 year fixed.BR: Please make the pain stop . . .

And so on.

Huge swaths of people, did not understand what they were buying, what it cost them, what their other options were, whether they could afford it or not.

I am not saying this to exonerate their ignorance — it is inexcusable in my opinion. Adults must take responsibility for their decision making, regardless of how foolish it may have been. That home buyers cannot figure out a basic financing document is beyond my comprehension. However, that is the way it is. We must acknowledge the simple reality, if we wish to avoid this problem in the future. That’s why we need to insure consumers understand what they are purchasing.

Currently, there are several proposals floating around to change the basic concept of a consumer protection agency. For the most part, these proposals are meaningless, watered down foolishness, bordering on idiotic. Let the Fed do it? They were already charged with doing this, and under Greenspan, committed Nonfeasance — they failed to do their duty.

The Fed is the wrong agency for this.

It does not need to be a giant bureaucracy, just a relatively simple set of disclosure laws to make sure consumers understand, in plain English, what they are buying. And the teeth to enforce them.

Americans have a hard time with complex math. And in Finance, we have a carnivorous sales force that eats its young, and sells their grandmothers near worthless CDS at par. Forcing this rapacious group of Ferengi to comply with fair cost disclosure is not asking too much.

If we are going to have an informed consumer class making intelligent financial decisions, a Consumer Protection Agency is a good place to start . . .

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

Barry – Bravo. One minor quibble that turns into a major problem at the heart of it though.
Arguing by analogy we don’t ask our heart surgeon to each us the ins and outs of his trade, rather we trust and depend on him to do what’s best and INFORM us to the best extent possible and reasonable so we can make a reasonably informed decision. We also get multiple opinions.

Asking the average consumer to understand financial documents that are hundreds of pages and deliberate obscure and complicated is like asking you to design your own heart operation. Nor can we point just at consumers. The entire financial crisis was created by executives who had, literally, no clue as to how the rocket science they were depending on to work. (NB: it would appear from your recent GS and MER posts that only one sr. exec. team did get it and they used that to play the entire rest of the world, literally. Who thought we’d see Orange Country redux thrice).

As Dr. Johnson puts it, “don’t ask a man to understand it when his livelihood depends on his not understanding”. The bigger implication, in other words, is that the financial companies don’t make money by creating value they make money by deceptive practices deliberately designed and built to mislead. That’s quite a business model and a horrendous indictment of the situational ethics of the Industry.

Can this go on? Not forever – one way or another there will be a Darwinian sortation process. We can either anticipate and correct it or deal with the consequences when it blows up. In the meantime we have a complete abdication of any sense of social responsibility by the Industry. In the long run they will destroy themselves because society cannot afford to have an Industry who’s central value proposition is based on harming people.

I like your analogy to the FDA nutrition labels, that does paint a decent picture. And I’m sure there’s a way to provide easy to read (easy to compare) table to disclose how loans compare that would make it easier for time-pressed, emotionally stressed people to comprehend what they are committing to.

While we like to make fun of people who signed up to dumb things on the bottom line, often these occur when people are not at their best – emotionally involved and probably pretty nervous about making such a large purchase. You’d think they’d be extra cautious and some are, but many probably have the wrong part of their brains taking over at that time.

Things really are kind of hopeless when Congres can’t push through something seemingly so innocuous. But that is where we are. The lobbyists do run the show and they know it.

Americans have a hard time with complex math. And in Finance, we have a carnivorous sales force that eats its young, and sells their grandmothers near worthless CDS at par. Forcing this rapacious group of Ferengi to comply with fair cost disclosure is not asking too much.

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Let’s not forget the everyday 1% to 2% everyday investment advisory who think nothing of keeping people invested just to keep the commissions rolling in. “OK, if stocks look a little punk, lets put it all in bonds.”, without mentioning that interest rates are about as low as they will ever go and bond math says prices have nowhere to go but down.

Or “China’s on FIRE! Emerging markets is the place to be.” without mentioning the empty cities, the vacant districts of office buildings, the commodity hoarding, or the winding down of China’s version of ZIRP.

I especially love the ones who tell elderly (80+) people with strong lizard brain impulses who need their savings to finish out their lives they need to keep invested because “What else are you going to do with it? The economy is recovering. You can’t earn anything in the banks.” (PS I’m the backstop for this elderly individual, forcing me to be ultra conservative because I won’t ignore the possibility that the avaricious adviser or a different one who has entered the picture hasn’t already convinced my relative to secretly put a toe back in the water.)

Or my idiot in laws who worship their adviser, without considering that if he were so smart, then he would be rich. And, if he were rich from investing, why is he bothering with them. If they weren’t relatives,I wouldn’t be bothering with them. Especially if I was rich.

BR said: “Considering that we are a nation that made the Snuggie, the Sham-Ease, and Hair-in-a-Can all best sellers, a little impulse control is probably a good idea.”

Response: Exactly! But Considering, as a nation, how impulsive we are this is unlikely on a large scale.

Br Said: ” That the banking lobby stopped this simple consumer disclosure in its tracks reveals they want nothing to stand in between themselves and any profit, no matter how ill-gotten. That even this simple consumer disclosure was thwarted is testament to how corrupt Congress has become.”

Reply (getting on soapbox): There is a major issue here that extends to all Federal (and probably most State) regulators. As long as their existence depends upon the legislative and executive branches of government, regulation and enforcement will always be subject to the whims of the political process. The entire political process at both the executive and legislative levels is corrupted by a sizable dependence upon and indebtedness to private enterprises whose interests are often in conflict with those of the people. That is where Markopolos, in his blasting of the SEC on the investigation of Madoff or the Fed on their treatment of banks, almost gets it right. Yes the SEC badly and repeatedly fumbled the ball on Madoff (and many others) and apparently tried to throw the game. But I have little doubt that any investigative efforts they might have considered were subject to some fairly profound political considerations. Typically any consideration of potential political consequences will win over duty or mission until the issue at hand promises to be embarrassing to the regulators. Until we find a way within our democracy to resolve the multiple conflicts of interest between business and government that extends to regulatory authority and enforcement another regulatory agency will just be more clutter on the playing field. A good start would be serious consequences, including terminations as well as criminal and civil penalties, for those within government who are charged with regulatory oversight and fail in their duties, and in doing so undermine the regulatory process.

past that, if these “math-phobic shopaholic shit junkies.”(–BR, above) can’t be bothered to do as much ‘Homework–’ for a transaction that can, literally, change their Lives–as they do for planning for lil’ Jonny’s Summer Camp, or their, next, Vacation, then “consumper protection, roflmao, nutrition analogy is correct, the only that will correct is people borrowing less and less and less as time goes on, f’ em”–torrie-amos, above..

HB: Look, here’s are loan docs.
BR: See, your loan resets next year.
HB: That can’t be what it says.
BR: Right there, you loan resets to a variable rate based.
HB: Nope, my mortgage brokers is my best friend’s doctor’s dogs former owner…
BR: Look. Look at the document.
HB: …and this is my new, improved Sham-Ease
BR: The one that slices and dices.. and can catch fish?
HB: Yup.
BR: Maybe Bill Gross had something about cocktail parties the other day…

Actully, one of the most significant new regulation/disclosure efforts was recently done administratively HUD regarding RESPA and TILA. This has not been a huge success, from what I have heard.

A large part of the ARM problem that I haven’t seen covered is how little sense these loans made for all the parties involved. The basic premise of the the 2/28 ARM was that the borrowers would get a fixed rated for two years, and then do a new loan shortly after the reset. The major perceived risk at the time for borrowers was that rates would go up, so the borrowers might have to do another ARM to get a managable rate. Virtually nobody talked about the greater risk – that the loan would be unrefi-able due to falling property values, or deteriorating credit.

The ARM market priced its products in ways that really don’t add up, to me. First, the 2-year rate was based on the idea that shorter term financing generally has better rates that longer term financing. But, the loan pools had to account for pre-payment risk, so many of the loans had pre-payment penalties. But, if the borrower waited out the ppp period, and still pre-paid, the loan pool still suffered the loan fallout, yet didn’t get compensated. As long as the housing market moved in the right direction, ARMs guaranteed an evergreen supply of borrowers to make new fees from, but these fees didn’t go to the lenders (for the most part), they went to the middlemen. In fact, the MM originator made more to sell the ARM, but I’m not so sure the pool made money under this (I’m wondering).

In short, the pool had two significant risks: 1) that a high number of loans in the pool would prepay right after the ppp expired (which everybody thought would happen); or 2) that the remainder of these loans couldn’t be paid off at all because the precendent conditions for default were so strong (falling values, no-longer-credit-worthy borrowers, which nobody seemed to consider). There’s a third aspect, too: that performing loans, after resetting, reset in a very low interest rate environment, denying the pool a big jump in return over principal.

I realize I’m giving short shrift to the consumer here, and that the rip-offs were rampant (many servicers had no idea what the prepays were on to-be-paid-off loans, and just made them up – and have lost some rather hefty class actions, as a result). I just have a hard time understanding how the “lenders” or loan holders thought they were going to end up here.

I still don’t see how the pool owners thought they could make money long term as investors. Either they had to believe they would be out well before (that they were really just funding short-term financing at a premium that seems to have been paid to a MiddleMan), or they didn’t understand how bad staying in the pool would be because fewer and fewer borrowers could afford (or be willing) to make payments to them the longer they were in.

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The average person who has managed to rise to the middle class or above with nominal effort believes themselves to be a gifted thinker who can’t be fooled. I see lazy minded half wits who find spiritual strength in numbers. If I weren’t in a back stop position, I would not care one whit about who is stealing from whom. People are as smart as they want to be, and many who dumpster dive for a living probably had and still have numerous chances to improve their lives.

Note to thieves: if you can find some way to walk around me and those I have chosen to backstop, steal anything you want. I honestly don’t care. People have the regulation they want right now. If this regulation says “it’s yours if you can figure out how to truck it out of here” then go for it. I generally ignore pathetic sounding cry babies who just faced a little cold reality for maybe the first time. Take it all.

More bureaucracy is never a good thing. The reason we need consumer protection is because our laws are far too complex to serve as viable regulations on business. The complexity of these statutes hides the loopholes that enable the fleecing of citizens by private and public institutions. More of the same will not help.

A really good example of this is the 2,700 page healthcare bill, which should contain fewer than 10 pages. Regardless of the intent of this legislation, the complexity of the law, as proposed, will cause the consumer and the taxpayer to pay more while the healthcare “industry” will reap record profits.

Instead of a consumer protection law or agency, we should simplify the laws already governing consumer/business affairs, so that the average person can understand exactly what they are buying as well as clarifying the rights and responsibilities of each party to a transaction.

The first laws to be rewritten should outlaw usury (as was traditional in modern Western civilization until recently), and reform the bankruptcy code so that it does not favor usurious lenders.

At the heart of all this, as you point out in the ‘party talk’, is 1.) the widely pervasive penchant of many Americans to completely glaze over and deny any new information concerning the topic they have been ‘discussing’ and 2.) their opinion that you are obliviously insane for saying it to them. In other words, arrogance on both sides of this equation made it work. Along with greed, of course.

Unfortunately, most “consumers” are boneheads when it comes to the most basic financial stuff. It has always been this way, and probably always will.

Instead, I think that financial products should be a little more like investment products. Mutual funds are regulated so they are relatively reliable and straightforward. For leverage and fancy tricks, you have to be an accredited investor.

Likewise, you could have a rule that mortgages below $200,000 (for example) can only be financed with fixed-rate, fully amortized mortgages.

We also need regulation of credit cards. LIBOR + 10% as a max rate would be a good start, plus something to cap the fees.

You really think you want the truth? The problem is people think they can but they really can’t handle the TRUTH.

Truth is most of your small businesses out there STILL haven’t paid back the money they used to start the business and they have no intention of ever doing so.

Banks don’t give a flying F about businesses. Businesses don’t give a flying F about Banks. Customers don’t give a flying F about businesses. Businesses don’t give a flying F about the customers. Employers don’t give a flying F about employees. Governments give an even less of a flying F about all of them.

The sun will come up tomorrow. The moon will make the tides go in and out. The President will salute the flag.

My dog will lift his leg on the fire hydrant. My son will think I’m a dork in the days ahead.
My wife will think I’m the dumbest person on the planet.

My sister will think her brother is a drama king. My daughter will always love her dad.

And we’ll all still like Andy Griffith, Leave it to Beaver, The Sopranos, Entourage and play no limit hold em while beating the kid at concentration at the barbecue at the fourth of july regardless of the structure of any mortgage we may or may not have to incur.

You “WANT” people to not understand finance. One of the major problems today is we have way too many chiefs and not enough indians.

You can not P.C. your way to prosperity. Bring back MacArthur and Patton for some good ole Political INCORRECTNESS. I know never going to happen.

Too big a circus now. Oh well. Guess we’ll have to laugh at the Rodeo Clowns.

but, it is what Finance, and the Employed Politico, never wants to learn from Engineering– Simplicity pays Dividends.

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Dividends are for woosies. Why work hard and maybe get a fractional payment in return. Stealing pays mountains of cash, not dividends. And a lot of the time, it’s not even illegal. You sound like someone who reads books for the long run and believes them.

Depending on your methods, it might even be respected and emulated.

Look at long only commodity index funds. Massive return and no added value to the commodity user. The government is adamant about protecting this method.

Or, structure a complicated deal, earn a fee, bet against it legally, and wait for gravity to return. Cha Ching and its legal.

Or put your own people or hand picked flunkies in regulator roles. Legal and respected.

Create new methods to become middlemen in equity transactions, skimming a little from the middle on almost every stock transaction that occurs and you have exchanges building new data centers for you and begging you to rent space. Using the right algos, you can bias the market upward even on bad news. People consider you to be royalty.

I know one thing for Sure….. ‘FEAR’ me the day I adopt your morality and teach it to my kids.

I’ll bring back to good ole Vlad from Romania style of “business” acquisition. ROFL

It’s alright Junior, if you see a kid with a bike or a skateboard you want, just wait behind a tree and when they aren’t looking wack them over the head with a wiffle ball bat. They’ll be writhing in pain so long you’ll be a block away before they even know what hit them.

Lack of financial knowledge is not just a US problem, it’s a global problem.

Danske Bank published a survey today covering 18-27 year olds in Denmark, Finland, Sweden, Norway, Ireland and Northern Ireland. Note that these are some of the countries in the world with the best educated youth.

Some of the results:

37% don’t know what interest is
72% don’t know what APR stands for (34% think it is just the interest on a loan)
68% don’t know what disposable income is
56% cannot identify the cheapest of three loans

We understand that certain folks think they don’t have to work for a living and other folks do.
We understand how OUR payments fund YOUR fraud and ponzi schemes.

We understand how OUR taxes fund our local governments and get kicked upstairs.

We understand how to interpret legal precedent, what it means to “securitize” a loan, what it means to have access to the discount window, how companies are ‘issued’, why certain underwriters are privy to the deal, how professional investors get access.

this is the type of article that made me first begin visiting this blog. It’s what makes me keep coming back. Very well thought out, and easily communicated.

We all knew what was going on, everyone here, for the most part. Even The Mayor of Simpleton, me, knew that all this buying and spending and higher prices on everything was being done with a slight of hand. There were people making what I was making in 2005, which isn’t much less than today, buying houses 4x the value of the one I live in comfortably to this day. Meanwhile, they’ve had to sell and move back into smaller dwellings, as they “downsize” (with 2-3 growing children even younger than mine).

But you hit the nail on the head: an educated consumer with some financial literacy isn’t going to make a good bank customer. Great quote yesterday: “If you owe the bank $100, it’s your problem. If you owe the bank $100 Million, it’s the banks problem.”

You are absolutely 100% fucking right about this so stick to your guns and don’t be influenced by the usual knee-jerk American anti-government crap; that’s what ANYONE who is against ANY kind of regulation falls back on in this country because anti-government thinking is nothing short of a national psychosis here. And yes of course there are plenty of shortcomings in government but how many of us are willing to acknowledge the massive abundance of glaring shortcomings in the practices of private business people!!! Oh no, if it’s done privately in America it has to be most efficient and rational, that’s what our national psychosis tells us: if government does it it has to be all wrong and totally stupid; if private business people do it it just has to be efficient, effective and thoroughly beneficial. I just can’t believe how many otherwise reasonable people buy this ideological crap!

Isn’t basic capitalism premised on smarter people taking money from the rest? How far can consumer protection go? If the consumers are a bunch of impulsive boneheads isn’t it natural that their wealth be transferred to smarter, less impulsive people? Why should boneheads be rewarded by allowing them to keep their wealth? Wouldn’t attempting to protect the wealth of boneheads be a fools errand?

When I sell a stock it’s because I think it’s a smart thing to do and I snicker at the bonehead that is on the other end of the transaction. Do we need a protection agency to help everyone to whom I sell a stock (or myself if I end up being the bonehead)?

I think we should root out and prosecute fraud, and focus less on creating more rules and more government. Barry, you’re awesome, but I respectfully differ with you on this one.

MM: thanks for that info on 18-27 year olds. As i ranted about a couple of days ago, these are basic principles of finance and earning a living for yourself that turns some people into princes and others into paupers. If they KNOW the repercussions of signing up for that credit card to get a t-shirt, maybe they’ll decide just to buy a t-shirt. I had no idea, at 21, how much of a hole I could dig myself with credit cards.

Know what else I dug myself a pretty deep grave with? Women. Plenty of young, eager ones, for a smooth talking boy on a college campus in the south.

“William Black is a white-collar criminologist who has written a compelling account of how the bloated parasitic financial sector is ruining America in his recent post at Huffpo. These are Black’s five “fatal flaws” of finance:

1. The financial sector harms the real economy. Even when not in crisis, the financial sector harms the real economy. First, it is vastly too large.

3. The financial sector’s predation is so extraordinary that it now drives the upper one percent of our nation’s income distribution and has driven much of the increase in our grotesque income inequality.

4. The financial sector’s predation and its leading role in committing and aiding and abetting accounting control fraud combine to: A) Corrupt financial elites and professionals, and B) Spur a rise in Social Darwinism in an attempt to justify the elites’ power and wealth.

5. The CEOs of the largest financial firms are so powerful that they pose a critical risk to the financial sector, the real economy, and our democracy.

The Solution: Fix the real economy, if you can find it. “The real economy came off the rails at least three decades ago for the great majority of Americans.”

Amen. I’ve had too many similar cocktail/bar/bbq conversations on mortgages, including with well educated people.

Fixing the Law requires Fixing Congress
Fixing Congress requires Fixing Campaign Finance
Fixing Campaign Finance requires Congress to Amend Constitution, which no one is working on.

How did giving slaves rights end up meaning that corporations had civil rights? A simple rule of thumb, if you can’t vote for a candidate, then you can’t finance that candidate. Corporations and organizations can’t vote, so they can’t finance candidates.

Personally, I’d do away with corporate income taxes if it meant corporations no longer had rights ascribed to citizens.

@Hoffer: I hear you, but I hate to say it – I’m with budhakOn on this one. Nobody’s interested in “fixing” anything. Much of our economy is based on predator-like activities. Without it, the economy probably arrives at a stand-still. Look at the little poll that MM posted and you undersand there are “more important” things to attend to. Nobody cares. The Boys of Summer are back.

The poll that MM posted also tells me that we’ll be bailing out the stupid, criminal, and criminally stupid quite a bit in the coming years. Might as well just accept it. There will be many more bailouts to come.

@ dussasr 9:31
“Isn’t basic capitalism premised on smarter people taking money from the rest? How far can consumer protection go? If the consumers are a bunch of impulsive boneheads isn’t it natural that their wealth be transferred to smarter, less impulsive people?”

Hmmm… Following that logic then the strongest person steals from everyone else because they can, or maybe it’s the best armed person who steals from everyone because they can. Reminds me of the jungle or the animal kingdom. I guess I keep viewing human society as something a bit more “advanced” which includes some protections so that the disabled person isn’t left with no valuables because there are stronger more “abled” people who can just overpower them and take everything. I guess I respectfully disagree with your thesis, dussasr.

I’m not sure that we need ANOTHER “protection” agency since we already have half a dozen. The law requires that you receicve a HUD-1 at the time of the mortgage application and again at settlement table. The bottom line is that no onw cares what numbers are on the paper – they wanted the house, someone showed them a way to get the house and they signed away until they could move into the house.

Can you explain how another consumer protection agency is going to “protect” us from human behaviour?

Is that a real conversation you had with someone, or more than one someone at a BBQ or cocktail party?

If so I’m surprised anyone would want to have a conversation with you in the first place. It’s one thing to do that kind of thing on a blog, in person? Whether you’re wrong or right, who the hell does that kind of thing at a party?

Then there’s this “Americans have a hard time with . . .”

I won’t argue the point because I think it’s correct, but seriously, enough with the “Americans don’t understand” crap. You have readers from all over the world. I’d like to know if the average citizen in France, Portugal, Norway, Brazil, Canada, etc are any better with understand these things than a US citizen. My guess is, it’s a worldwide phenomena. Always remember that this is what you do for a living, I’d be shocked if you didn’t understand the basic ideas behind many of the things you blog about.

Last – I notice you didn’t ask them if, and how many points they might have bought to bring down the interest rate on their mortgage.

The problem is… the government thinks we need an “AGENCY” … when all we need is some simple standardization around 5 major different “types” of contracts. Then the main RATES and FEES can be clearly disclosed and terms easily understood. Every 5-10 years… someone wants to new product they can apply to have a standard contract.

Its funny bc this is how rental leases are done in Manhattan (their are 1-2 possible “standard” contracts).

Its funny bc in California almost all employment “non-competes” are illegal. It occurs to me, why isnt that true everywhere? Voters would ALWAYS vote to make broad non-competes illegal. Shows the political influence of businesses.

New Ghost Towns: Industrial Communities Teeter On The Edge
March 3rd, 2010

Via: USA Today:

Whether it’s textiles in the Carolinas, paper in New England or steel in the Midwest, most industrial cities and mill towns “are on pins and needles,” says Donald Schunk, an economist at Coastal Carolina University. “Day to day, week to week, any manufacturing facility seems vulnerable. People don’t know if they’ll be there.”http://cryptogon.com/?p=14117

Jeff,

“giving a ****”, or not, there are some simple Economics that are making themselves known.

LSS: We can, either, Produce, and reclaim an opportunity to be Free, or We can choose to Consume, and be held Slave to those desires..

like krice, above, I think the Higher Road, less traveled it may now be, is more fitting for our Journey.

How about teach kids in high school about something other than sex?? Like responsibility and things that sound to good to be true probably are. Protection agencies are fine as you described, but always have the potential to be the EPA and over extend themselves. I prefer people get smarter than dumb down the system.

“A large part of the ARM problem that I haven’t seen covered is how little sense these loans made for all the parties involved.”

Sadly, they made perfect sense for speculative real estate and those leaching from it. People who planned to “flip” the house in 6-18 months found the terms wonderful. Banks loved speculative real estate “investors” because they would generate new closing fees. Why not give these guys quick and easy loans? Who cared if they were mostly buying and selling houses to each other, leaving the poor schmucks who were just trying to find nice places to raise their families stuck with wildly inflated house prices they couldn’t afford.

Except… hey! Who says you can’t afford them?! Us banks got this awesome new mortgage vehicle that will get you into homes at 4% interest. Of course you can afford a $300,000 home that was worth $150,000 three years ago! The odds of the rate going up are practically nil, the fed just keeps lowering rates… look at this graph!!! Look at this other graph! Here’s a chart of how much money you’ll save!!! I’m selling 3 of these mortgages a day to much more wealthy people than you; its a really great, safe deal!

The brokers were just going to dump the mortgages on countrywide or citi or BofA in a month or two, so they didn’t give a crap about whether they would get paid back. They got their 3%-6%.

As to people needing to be responsible enough to know financing rules… are you fucking serious? We’ve removed about every bit of consumer education from our schools. Where are they supposed to learn this? People have enough to deal with in their lives without needing learn every in and out about a purchase they will make only a few times in their life. Life is far too full already for people to have to learn about every nuance of everything they buy. I’m a chemist, I know how to read packaging labels and food ingrediants and pharmacy sheets. I would never tell anyone that if they don’t know what is in their toothpaste or how their peanut butter was processed then they derserve to be ripped off or poisoned. Should companies be allowed to use a cheaper, more toxic paint ingrediant so long as as they put “dichlorobenzene” on the label?

That is why we need government regulation. It is impossible for anyone to know every single bit of the complex world they live in. It is far too easy for a manufacturer of anything, including financial products, to use their superior knowledge (they do it everyday, after all) to take advantage of what you don’t know, and would never even suspect.

As to people needing to be responsible enough to know financing rules… are you fucking serious? We’ve removed about every bit of consumer education from our schools. Where are they supposed to learn this? People have enough to deal with in their lives without needing learn every in and out about a purchase they will make only a few times in their life. Life is far too full already for people to have to learn about every nuance of everything they buy. I’m a chemist, I know how to read packaging labels and food ingrediants and pharmacy sheets. I would never tell anyone that if they don’t know what is in their toothpaste or how their peanut butter was processed then they derserve to be ripped off or poisoned. Should companies be allowed to use a cheaper, more toxic paint ingrediant so long as as they put “dichlorobenzene” on the label?

That is why we need government regulation. It is impossible for anyone to know every single bit of the complex world they live in. It is far too easy for a manufacturer of anything, including financial products, to use their superior knowledge (they do it everyday, after all) to take advantage of what you don’t know, and would never even suspect.
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The Federal Reserve Board on Wednesday proposed a rule amending Regulation Z (Truth in Lending) to protect credit card users from unreasonable late payment and other penalty fees and to require credit card issuers to reconsider increases in interest rates.

“This proposal addresses two key costs of using a credit card–fees and interest rates,” said Federal Reserve Governor Elizabeth A. Duke. “The rule would prevent credit card issuers from charging large penalty fees for small missteps by consumers and would require issuers to reevaluate rate increases imposed since the beginning of last year.”

Among other things, the proposed rule would:

* Prohibit credit card issuers from charging penalty fees (including late payment fees and fees for exceeding the credit limit) that exceed the dollar amount associated with the consumer’s violation of the account terms. For example, card issuers would no longer be permitted to charge a $39 fee when a consumer is late making a $20 minimum payment. Instead, the fee could not exceed $20.
* Ban inactivity fees, such as fees based on the consumer’s failure to use the account to make new purchases.
* Prevent issuers from charging multiple penalty fees based on a single late payment or other violation of the account terms.
* Require credit card issuers to inform consumers of the reasons for increases in rates.
* Require issuers that have increased rates since January 1, 2009 to evaluate whether the reasons for the increase have changed and, if appropriate, to reduce the rate.

The proposed rule represents the third stage of the Federal Reserve’s implementation of the Credit Card Accountability Responsibility and Disclosure Act of 2009 (Credit Card Act), which was enacted in May 2009. The provisions of the Credit Card Act addressed in this proposal will go into effect on August 22, 2010. In July 2009, the Board issued a rule implementing the provisions of the Credit Card Act that went into effect on August 20, 2009. In January 2010, the Board issued a rule to implement the provisions of the Credit Card Act that went into effect on February 22, 2010.

The notice that will be published in the Federal Register is attached. Comments on the proposal must be submitted within 30 days after publication in the Federal Register, which is expected shortly.

[...] – A consumer finance protection agency is a great idea, but it’s a shame that a simple mandate in the original plan — compare all mortgages to plain vanilla 30-year fixed contracts — was rejected, FusionIQ CEO Barry Ritholtz says. [...]

I like to think I try the best I can to research and investigate the options before making a major purchase so I can arrive at an intelligent decision.

Case #1

My truck of many years finally gave up last year and I had to replace the vehicle. Prices for used vehicles with decent mileage and little wear or tear were much higher than Iw anted to sepnd. Even government auction vehicles were scarce. Considering I intended to drive the truck for the life of the vehicle, it made sense to look at new. I test drove several, checked out various consumer reviews, blue book value, loan options, and getting an excellent rate, ended up buying a Toyota Tacoma – now just recently added to the recall list.

Case #2

In my late 20′s, I had financial responsibility for one of my parents. My income was still modest but it was clear I needed to start a long term investment strategy. Again, after doing some research and looking at my personal needs and abilities – I chose a whole life policy through Prudential. About a month after I signed on the dotted line, Time magazine actually pointed to the Prudential WL policy as a good conservative investment. The Prudential class action suit was announced about 5 years later. That little episode almost bankrupted Prudential.

So – two blue chip brand name companies with extensive track records, great reputations, solid histories and yet both companies more or less lied to me, a simple consumer who made the mistake of believing the information actually available to me from a wide variety of sources.

At this point, it pretty much seems like everything is based on lies – so no option but to proceed accordingly. I’m not saying a consumer protection agency would have helped me in either situation, but its a good first step to at least make sure people have a basic grasp of what they are signing up for.

As one of those Ferengi (loved that) bankers for 30+ years… I’ve closed 100′s of loans – mortgage and commercial mostly. Piles of paper. Know how many over the years have insisted on reading the documents before signing? Exactly 3.
Just guided the bank to implement the new RESPA Regs. If people won’t read what they are signing will “simpler”, “clearer” and more consumer friendly documents help? Not much.
So, what to do? Good suggestion above about requiring disclosure if NOT a fixed rate. Similar to Rescission. Mine: require the lender to READ a script with the terms contained therein. In the middle of the joviality and good feelings which prevails, having to stop and read something cold and factual might help. Plus it is surprising how many really cannot or don’t want to read.
The fundamental problem not mentioned above is that people have this warm, trusting, lowered guard feeling toward financial institutions. They are “safe” aren’t they? FDIC-made safe deposits do not make it a place of safety. Caveat emptor.

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About Barry Ritholtz

Ritholtz has been observing capital markets with a critical eye for 20 years. With a background in math & sciences and a law school degree, he is not your typical Wall St. persona. He left Law for Finance, working as a trader, researcher and strategist before graduating to asset managementRead More...

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